Business rescue – effect of termination on surety’s obligations

In Van Zyl v Auto Commodities (Pty) Ltd [2021] 3 All SA 395 (SCA), Section 154(2) of the Companies Act only precludes creditors from pursuing claims against the company after the business rescue plan has been implemented. It does not affect or extinguish the liability of a surety for the debt.

By Merilyn Rowena Kader LLB (Unisa), Legal Editor at LexisNexis South Africa.

Corporate and commercial - Business rescue – effect of termination on surety’s obligations: As a prerequisite for its supplying a company Blue Chip Mining and Drilling (Pty) Ltd (BCM) with petroleum products on credit, the respondent, Auto Commodities (Pty) Ltd (Auto Commodities) required the appellant Mr Van Zyl to bind himself as surety for BCM’s resulting liabilities, which he did in July 2014. In December 2014, BCM was placed under business rescue. After adoption of a business rescue plan, Auto Commodities received two dividends. The business rescue terminated on 31 January 2017 because of its substantial implementation. On 21 July 2017, Auto Commodities issued summons against Mr Van Zyl for an amount in excess of R 6 million, representing the shortfall regarding BCM’s original indebtedness. Its claim, based on the deed of suretyship, was upheld in the High Court.

In Van Zyl v Auto Commodities (Pty) Ltd [2021] 3 All SA 395 (SCA) on appeal, the only issue between the parties was whether Mr Van Zyl was liable under the deed of suretyship to pay the amount claimed by Auto Commodities. His contention was that, when BCM’s business rescue was terminated, s 154(2) of the Companies Act 71 of 2008 (the Act) released BCM from any further indebtedness to Auto Commodities. He submitted that that in turn released him from liability because suretyship is an accessory obligation.

The business rescue plan contemplated a compromise between the debtor and one or more of its creditors, in which case there would be an unpaid balance for which the surety would remain liable. A liquidation would be one instance of such circumstances. Even if BCM as principal debtor was released from its obligations, Auto Commodities’ rights under the suretyship were unaffected and, whether or not it supported the business rescue plan, it did not operate as an abandonment of its claim against Mr Van Zyl.

The court addressed Mr Van Zyl’s legal point as leave to appeal had been granted based on that point. The starting point for Mr Van Zyl’s argument was s 154 of the Act, which is directed at the consequences of approval and implementation of the business rescue plan for the enforcement by creditors of any debt that existed prior to the business rescue process. It provides that the creditor will not be able to enforce the debt except to the extent provided for in the business rescue plan. The section did not support Mr Van Zyl’s arguments that Auto Commodities could no longer enforce any debt, which was owing to the creditor by BCM prior to the business rescue; that as a result of the implementation of the business rescue plan, BCM did not owe anything to the creditor; and that the accessory suretyship obligation was discharged. An inability to enforce a debt is not necessarily an indication that the debt has been discharged. If the whole or a part of the debts of a company become unenforceable as a result of the adoption and implementation of a business rescue plan, the fact that some creditors may pursue the balance of their claims against sureties, who will have a right of recourse against the company, does not negate the purpose of business rescue. Section 154(2) does no more than preclude creditors from pursuing claims against the company after the business rescue plan has been implemented. It does not affect or extinguish the liability of a surety for the debt. The appeal was dismissed with costs.

Merilyn Rowena Kader
Legal Editor at LexisNexis